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How To Pay Down Your High Interest Debt Without Feeling The Pinch
Are you one of the millions of Americans that have a credit card bills each month that, added together, seem to engender the same response in you as a novice climber would have when setting their eyes on Mount Everest? Many feel that the debt they have accumulated over the years is uncontrollably and irrefutably overwhelming. We all know from the many commercials which are advertised on the television from so called do-gooders and financial analysts that the minimum monthly payment is virtually all interest and it takes years and years to pay off a card when only choosing that option each month. Yet with the economy in shambles and the cost for goods at an all time high coupled with stagnant wages, how does one come up with a better alternative?
Well, a multi-pronged approach is in many cases the best route to take.
- The first step is to analyze how high the interest rate is on each of your credit cards. There are many credit cards out there that lure new customers in by offering a 0% or very low interest rate on balance transfers for at least 6 months. Take some time to do the math and see how much you would save by just paying the minimum payment amount for 6 months, but instead of it just going in the bank’s pocket, it would go directly toward paying down your principal. However, there is need for a word of caution; make sure to determine what the interest rate will adjust to on the new card after the introductory period. As long as that is competitive, then transfer your balances over and enjoy the savings! (See: Balance Transfer Cards)
- Secondly, for many of us the fact that we didn’t compromise our desires and wants is probably the reason we are in the situation we find ourselves now. We really need to cut back in areas of spending that are frivolous. Taking 10 or 15 minutes to do this will often reveal a significant amount of money we could put towards credit card bills instead of our daily Starbucks fix, going to the mall shopping to kill time, or buying expensive clothes; and the list goes on. How bad you want to get out of debt will determine how much motivation you bring to the table.
- Lastly, commitment to a long term plan of action is necessary. It took a while for most of us to get into substantial debt; it will also take time to remedy the situation. However, by committing to this new financial responsible attitude each month one can see themselves chipping away at that mountain of debt and over a relatively short period of time, it will get much more manageable.
These 3 strategies used in cohesion with one another can limit the difficulty of paying down your credit cards and the feeling that your situation is insurmountable. Pretty soon, you will once again be one of the few, one of the proud that can call themselves debt free!
Related articles:
- Credit Cards Kiting
- How long will it take you to pay off your Credit Card? (The famous one year plunge article)
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Are you curious about the Credit Card Industry? Get the inside scoop
How did the credit card industry came about and how did it become such a big business in America?
What was the tilting point in its growth explosion and how was it determined how much the minimum payment should be?
In collaboration with the New York Times, PBS’s FRONTLINE documentary Secret history of the credit card does an astonishing job at investigating the credit card industry, and exposing their secrets.
“The almost magical convenience of plastic money is critical to our famously compulsive consumer economy,” Bergman says. “With more than 641 million credit cards in circulation and accounting for an estimated $1.5 trillion of consumer spending, the U.S. economy has clearly gone plastic.”
Useful for anyone working in the financial world, or in any business, or anyone interested in credit cards and how things work, you can watch the full program online at PBS.org in its entirety with useful notes and explanation, a must watch.
Link: PBS’s FRONTLINE: Secret history of the credit card.
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Women & Money: Owning the Power to Control Your Destiny
What Are Your Credit Cards Really Costing You?
Credit card interest can be a financial killer if you are not handling your credit cards correctly. If you are only paying the minimum amount of money on your cards each month, you are setting yourself up for a large financial downfall. Imagine you carry a balance of $5,000 in credit card debt with an average interest rate of 16%, it would take you at least 12 years to pay off the balance. The balance would increase about $2,500 with interest fees, leaving you with a total bill of $7,500.
$2,500 could afford you many other things in life. That amount of money would pay for home repairs, a nice vacation, or an excellent deposit into a savings or retirement account. Paying that amount of money as an interest payment on credit cards is like using your cash for firewood.
There are steps you can take to help getting your credit card debt under control. Here are a few tips to keep you paying down your balances and not wasting your hard-earned money.
- Stop Making Unnecessary Purchases.
- Get Control and Understanding of What You Owe.
- Pay Your Cards with the Highest Interest First.
- Keep Away From Penalties and Fees.
- Keep Away From Penalties and Fees (YES this is so important that’s worth repeating).
By implementing these tips your credit cards will stop costing you the high price many are paying.
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Credit Card Kiting
Taking advantage of the float on checks to obtain loans is illegal, it’d called Check Kiting.
But taking advantage of Credit Card float is perfectly legal. And with so many credit cards enticing good borrowers with alluring balance transfers offers, often times one full year at 0%, some people are taking advantage of this one full year float and switching from card to card, from issuer to issuer.
If you are thinking about engaging in this practice, there are a few issues that you need to consider:
- Monthly payments: you still need to make the monthly payments, a balance transfer offer enables you to transfer the balance from one card to another, but the obligation to a minimum monthly payment remains.
- Pay it off: if your goal is to eventually pay off our credit card debt – and it should be -, switching to a 0% card will accelerated the process only if your monthly payment is higher than the minimum payment indicated in the statement. A very simple rule is to take your current monthly payment and send the same amount every month regardless of the (lower) minimum payment required by the credit card company. See article How long will it take you to pay off your Credit Card?
- Read the fine print, part I: for each balance transfer offer you receive look for transfer fees, maintenance fees, and other fees associated with the transfer and the maintenance of the card and of the balance. If you are switching to a lower interest rate, is it worth it?
- Read the fine print, part II: are there any requirements to maintain the low introductory APR? Does it fit within your habits? Can you afford it? Is it worth it?
- 1, 2, or 3 cards? If you accepted a balance transfer offer and you’ll be using the same card to make regular purchases, beware that usually credit card companies will apply any and all payments to the balance with the lower APR first (the balance you transfer), so you might end up having to pay high interest rate on the balance that accumulates from your everyday purchases even if your monthly payment is greater than the new purchases. We strongly suggest that, you use two credit cards, one for your old debt that you are paying off regularly, and another one everyday purchases like gas, groceries, utilities and the like, and pay off this balance every month.
We also suggest you have another card, a third one, everyone should also have one additional credit card, with no balance on it, for emergencies.
If you don’t have the discipline of charging only what you can afford to pay off at the end of the month, don’t use a credit cards for your everyday purchases: pay cash! - Shop around for the lowest balance transfer offer, for the longest period, with no or low fees, and with the lest requirements. Experts suggest to switch only if you can get at least 6 months at 0% or 12 months at less than 4.99% APR. We can help with our articles and offers on balance transfer cards, and low interest credit cards.
- Maintain your good credit or improve your credit: ask around, people with good credit are inundated with balance transfer offers at 0% APR for one year or longer.
- How to transfer your balance: Experts suggest to always use the special checks that you receive in the mail from your existing credit card company, or ask the credit card company with the best balance transfer offer to send you some. Try to avoid using Customer Service Representatives to make the transaction, there might be some fees or terms that you won’t have time to evaluate. If you are doing the transfer online, read all the fine print before clicking and accepting terms and conditions.
- The Personal Finance 101 rule #1 still applies: if you don’t understand something, don’t do it.
- Rule #2 states: if it’s too good to be true, it probably is.
- Be on the lookout for a better deal: if you transfer your balance to a low APR card, be on the lookout for a 0% balance transfer offer.
- Relax: if you’ve transferred your balance to a 0% offer, mark your calendar, a couple of months before the expiration of the offer, be on the lookout for another 0% balance transfer. Till then, make your monthly payments on time, and relax.
- Give yourself some time: don’t wait until the last few days of your current balance transfer deal. Experts suggest to put things in motion for a new transfer at least 30 days before the current deal expires.
Use your credit wisely, it gives you, the borrower, great power, freedom and control when it comes to credit cards, personal loans, student loans, auto loans, mortgage, cell phones, utilities, it follows you in everything you want to do in your life.
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Don’t Like Travel Restrictions? No Problem
You have finally earned enough points using your credit card to actually qualify for a free airline ticket. It has taken you awhile since they don’t accrue very fast, but sure enough you got there. You consult your calendar, you peruse the myriad of travel destinations that you wish to enjoy and then make your final decision of where and when to go. With a sigh and relief and anticipation you go ahead and pick up the phone to call your credit card company and make the joyous flight reservation.
After all that planning you are informed by an emotionless and unflinching reservation specialist that you are not able to redeem your points at that time of the month. Not only that, but you cannot redeem them with the airline which offers the flight schedule you had found. Sorry, you are on your own.
If you can relate with these credit card “Miles Card” program woes, you are not alone. If fact many thousands of Americans each year are affected by just this scenario. How does one get around it? The Discover Business Miles Card. It has all the normal bells and whistles of a great travel credit card, but it also offers absolutely unrestricted travel through any airline, travel agent, or online travel site no matter what the date. Finally you have the control on how to use your hard earned points.
Additionally, there is a 0% introductory APR, double miles on gas and travel purchases and one mile earned for every $1 spent on other card purchases. If you like to fly for free, you have found the right card!
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Photo Credits: Miguel Sancheese (cc)
Lowest APR Credit Card (not a catchphrase)
Are you fed up of hearing this redundant catchphrase of lowest APR credit card available today? Is there really any way to tell who is the lowest? Is it really even that important in the first place? The truth is that it’s very pertinent if you are not paying your entire balance very month. The difference between even a four or five percent variation could be fifty or sixty dollars a month or even more. Obviously if you are paying off your entire balance each month then it’s irrelevant.
Now, realistically speaking there probably is some way to tell which credit card company really does have the lowest APR. No doubt these companies keep tabs on each other and quite efficiently at that. However, for us the consumer, it can be challenging. So many cards offer a 0% introductory APR, but after that what really can we expect. After much searching and comparison shopping, it seems the Citi Platinum Select MasterCard might have the absolute lowest rate. As of right now, after their introductory period of twelve months expires with the 0% APR, it adjusts to 8.49% APR. Many people pay more than that on their car loan. With no annual fee this might be the best offer out there right now.
Now if changing credit card companies on a regular basis doesn’t bother you, then just switching companies after the introductory period expires would allow you to always have the lowest APR, 0%. However, if you are like most and would rather hang onto your card for a while, the Citi Platinum Select MasterCard is worth taking a look at. It just might solve that elusive inquiry of who really offers the lowest interest rate!
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Be Heard! Express your opinion about the credit card industry to the Federal Reserve Board
The Federal Reserve Board, lead by Ben Bernanke, is proposing new rules for lending practices specifically geared toward the Credit Card industry, to be precise it’s the Regulation AA – Unfair or Deceptive Acts or Practices [R-1314]. And Bernanke wants to hear from you, and they made it as easy as sending an email.
So, if you feel you have something meaningful to contribute to this conversation, if you have concrete examples that could lead to improving the entire marketplace do not hesitate to send an email to:
regs.comments@frb.gov
make sure you enter “Reg – AA” in the subject line
The Federal Reserve has posted 1847 (*) letters and emails received, with 31,000 more that are not being posted (*); and they have also published a document that contains examples of the content of eighteen different form letters (2.2 MB .pdf).
This is democracy at its best, participate in the discussion, put your thoughts in writing, and send them to the ones who have the power to hear you and do something about it.
Good lending companies always welcome new and fair regulation, it weeds out the bad players, the bad apples from the bunch, and restores trust into such an important industry. The lending industry is the fuel of the economic engine of the Unites States, do your part to improve it: collect your thoughts, and participate.
(*) Official count as of this writing
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How long will it take you to pay off your Credit Card?
The other day we published the article How Much Credit card Debt do Americans Have? where, according to data released by Consumer Federation of America, the average American Household has $8,500 on credit card debt.
We love numbers, and we started wondering how long will it take the average American Household to pay off their average credit card debt, so we fired up our spreadsheet and we started calculating.
Obviously we had to make a few assumptions. This is what we used:
- For interest rate we used 11%, which is an average rate for a low interest credit cards.
- We assumed that this typical average American family would not accumulate any additional debt.
- We also assumed that this typical average American family would not charge any additional purchases on the existing credit cards. As you know we advocate that you keep one credit card for every day purchases and that you pay off the balance each month, therefore incurring in no additional debt, no interest charges, and you get the benefits and protections of using a credit card for your purchases.
- We assumed that the monthly payment is 1/50th of the balance or $ 10, whichever is higher.
- Lastly we assumed that this typical American family will continue to make the minimum payment indicated in each statement.
The answer is shocking! At that rate:
- It would take 27 years and 4 months to pay off the $ 8.500 debt.
- It will cost a grand total of $15,441.14 in total monthly payments.
- This family will be enriching the pockets of their credit card company by a whopping $6,941.14 in interest.
And this family is lucky, they have good credit and they qualify for a low interest credit card.
Families with bad credit have to deal with 18% and more on their credit card debt, but let’s take 18%, in which case:
- It would take 54 years and 11 months to pay off the $8,500 debt.
- It will cost a grand total of $32,487.76 in total monthly payments.
- This family will be enriching the pockets of their credit card company by a whopping $24,309.88 in interest. Remember, it started as a $8,500 debt.
Shocking, isn’t it? It’s the power of compounded interest, which was the one thing that puzzled and fascinated Albert Einstein.
Without trying to be Einstein, let’s see what happens to the same family once they make the commitment to eliminate debt, leveraging an easy and simple first step: keeping the same monthly payment constant, without decreasing it for any reason. As the outstanding balances at their credit cards decrease, they continue to send the same amount each and every month.
In the case of the interest rate at 11% that family will:
- Pay off their credit cards in 5 years and 7 months (instead of 27 years and 4 months).
- It will cost $11,422.46 in total monthly payments (instead of 15,441.14).
- They will paying only $2,922.46 in interest, saving $4,018.68.
What if they have bad credit but they adopt the same strategy and continue to send the same monthly payments regardless of the minimum payment indicated in their statements?
In this scenario the family will:
- Pay off their credit cards in 7 years and 11 months (instead of 54 years and 11 months).
- It will cost them $15,829.00 in total monthly payments (instead of 32,487.76).
- They will paying only $7,329.00 in interest, saving $16,980.88.
We believe that used correctly credit cards are great tools for personal finances; credit cards offer convenience, protection, perks, and rewards including cash back. But at times credit cards can become a burden; if that’s your situation, we suggest you rid of your personal debt as fast as you can. It could take as little as one year, if you take the plunge; but if that’s too radical for you, take a look at your total monthly payments for this month, and continue sending the same amount every month, as you can see from the numbers above it can make a huge difference.
You can find additional tactics to accelerate your repayment schedule in the following articles:
- The fastest way to pay down your credit card debt: the one year plunge.
- How Many Credit Cards? And How to Reduce Credit Card Debt.
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People want more. More cowbells, More out of life, more more more . . . it is the American way. Discover Card delivers it with the More Card and its Get More program
Why settle for less when you can have more?
Don’t you need more cowbells? And more bells and whistles from your credit card?
Imagine a card that constantly delivers more:
- Instant online approval.
- Low introductory APR on purchases.
- Low introductory APR on balance transfers.
- 5% to 20% Cashback Bonus at top online retailers in the ShopDiscover Network (*).
- 5% cashback Bonus in popular rotating categories like travel, home, apparel, gas, restaurants, movies and more.
- 1% Cashback Bonus on all other purchases.
- The Cashback bonus accrue automatically.
- No limit on the amount of Cashback bonus that you can earn.
- Double your Cashback bonus with gift cards offers from 100 Discover Cashback Bonus Partners (*).
- No Annual Fee.
- Easy online account access.
- Online bill payment.
Is that more to your liking? Get more, get the Discover Card. And now you can select the look of the card that you’ll be carrying in your wallet, Discover gives you 6 different and exciting designs to choose from:
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(*) See official Discover card web site for details.
The fastest way to pay down your credit card debt: the one year plunge
Beth sends us an email to our tipline asking:
“I am 27 years old, single, and I have too much credit card debt.
What is the fastest was to pay down credit card debt?“
There are questions where if you were to ask 10 people the same question you will get 10 different answers, if not more. And this is one of them: the fastest, best, optimal, way to pay down credit cards debt, or debt in general.
From a strategic perspective, there are three principles:
- Stop accumulating more debt.
- Slow down the compounding of interest.
- Pay down as much as you can, every month.
From a tactical perspective, what brought you to the point where you have to ask this question, will not take you out of debt, up to today you’ve spent more than you were earning, so a change in habits is overdue. What got you here, won’t get you there. And it has to be something that you feel that it is you, that you can “own” and be proud of it.
Most people will tell you to curtail your spending by going on a budget, buying generic brands instead of premium, cutting coupons, walk or take public transportation instead of driving, and these are all good ideas. But if you are like most people, you look forward to a budget as much as you look forward to a root canal.
So, if you have tried the usual budgeting, cutting back, and coupon clipping and it didn’t work, we are proposing a new creative idea: we’ll call it, take the plunge to get rid of debt right now. This is the one-year plan, so while it might seem a bit radical, it’s truly like a root canal: it doesn’t last long, and the benefits last a lifetime:
- Change job: go out there and find yourself a job that pays more and has a shorter commute. No matter what you hear about the job market there are always companies out there looking to fill a position. It’s very easy to find a job that pays at least 10% more than you current job, and once you get it, put that extra 10% from your paycheck into your monthly credit cards payment.
- Get a part-time job: The holiday season is coming, and stores are ramping up by hiring seasonal help. There are also telecommuting jobs that you can do, they might be using the same skills that you use at your full time job, or you can expand your horizon and follow your dream by getting your feet wet into a market or industry that you’ve always dreamed about working in. Put the extra money to work by increasing your payments to your credit cards.
- Now that you are looking for a new job and you have a part-time job, you will ave less time to shop. Give yourself a moratorium on shopping: no new clothes, no new stuff for your apartment for one year. Go dig into your closet for retro-look clothing, mix the shabby-chic look with funky, before you know you’ll be a trendsetter.
- No eating out, and pack your lunches. Do your grocery once a week, and make sure you are covered for your lunches at work, and your dinners at home. You don’t have much time anyway since you have two jobs.
- Sell your unused stuff: look in your closets, basements, storage area. For sure you have old clothes, electronics, furniture and other objects that you no longer use, or that you have no used in a couple of years. List them on Craigslist or eBay and sell them off, take the money and sent it to your credit cards company. Not only it will help lower your debt, but you’ll make someone happy by letting them buys something that they want and need at a good price. And you will de-clutter your life as well. Everybody wins.
- Social life: you do need a social life, but a friend in need is a friend indeed. Tell your friends that you are taking the one-year plunge to rid yourself of your credit cards debt, so while you will still be able to go to the movies, and for one drink here and there, you won’t be able to try the newest and greatest restaurants in town, or those awesome concerts coming to town. In exchange, offer your place as a venue for dinner and a movie (potluck), game board night, cranium night, book club, the possibilities are endless. Money doesn’t buy friendship. And if you know any of your friends who could use a break from their own credit cards debt, ask then to pledge with you the one year plunge.
- Holiday presents: tell your family and friends that this Holiday season you are giving yourself the best present ever: you are getting yourself out of debt, so you will not be able to buy them presents and they should not buy you a present either. If feasible bake them something like home made cookies just as a token of appreciation, and instead of a ready-made card, get pen and paper and write each one of them an old fashion letter telling them how much you love them, and how much they mean to you, and thank them for their support: past, present and future. And mean it.
Keep at it, keep a journal, and keep a monthly total of your total credit cards debt, how much you’ve paid down and how long it will take to bring the total balance to ZERO! And every month celebrate by treating yourself to something nice yet inexpensive, like a movie, or a small dinner with friends or a friend. Some people have even gone as far as to keeping a very public blog, documenting their progress, getting support, and also collecting donations and advertising their wares for sale.
Think abut this time last year, time flew by, and your credit cards debt is still unmanageable or worse.
Then think about a year from now, how will you feel once you see that all of your credit cards statements say:
Balance = $0.00 PAID IN FULL
How good will that feel, and it was because this article that started it all, that made you take the plunge, and now you have a brand-new job, closer to home, a shorter commute, experience in a new industry where you’ve always dreamed of working, and you are debt free: life doesn’t get any better, does it?
For additional tips on how to lower the rates on your credit cards and how to make the most of your monthly payment see the article: How Many Credit Cards? And How to Reduce Credit Card Debt?
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